English philosopher and statesman Francis Bacon observed in his Novum Organum that the human mind tends to notice what supports its beliefs while overlooking what does not. Public policy, at times, is not very different. Measures introduced in moments of urgency often carry the imprint of that moment and, occasionally, continue unchanged even when the context around them has quietly shifted.

India’s foreign direct investment framework has long attempted to balance openness with caution. Within this framework, Press Note 3 of 2020 (PN3) marked a decisive intervention. Introduced at the height of the covid-19 pandemic, it required prior government approval for direct or indirect investment from countries sharing land borders with India (LBCs), including China (even Hong Kong), Pakistan, Bangladesh, Nepal, Bhutan, Myanmar and Afghanistan.

The objective was clear: to prevent opportunistic acquisition of Indian businesses at a time of economic vulnerability.

However, as with many emergency measures, the challenge lay not in intent but in operation. PN3 cast a wide net. In the absence of a clearly defined threshold for “beneficial ownership”, even non-controlling or indirect holdings linked to LBC jurisdictions were, in practice, often interpreted conservatively.

Transactions that may not have raised substantive concerns were nonetheless routed through the approval process, leading to delays and uncertainty, particularly for global funds, venture capital funds including fintech startups, digital lending platforms, and non-banking financial company technology platforms with diversified investor bases.

Over time, these frictions began to intersect with a broader economic reality. Private capital expenditure in India remained uneven and demand visibility in several sectors continued to be limited, yet dependence on external supply chains persisted, especially in critical manufacturing segments. These are not temporary distortions, they point to deeper structural constraints.

At the same time, global businesses were actively rethinking supply chains, seeking to diversify risk and reduce overdependence on single geographies, a shift often described as the “China+1” strategy. India, in many ways, stood at the centre of this opportunity.

With recent amendments to the PN3 framework now signalling a more structured approach to approvals, the policy appears to respond to the lessons of its own implementation.

The revised framework, announced in March, addresses issues by introducing a more structured basis for assessing beneficial ownership. By aligning the determination with thresholds recognised under anti-money laundering regulations, it provides a clearer reference point, typically around the 10% mark, for identifying the level of non-controlling interests in an entity. In the absence of control or other regulatory triggers, investors falling below this threshold may now access the automatic route, subject to applicable sectoral conditions and reporting to the commerce ministry’s Department for Promotion of Industry and Internal Trade of India at the time of capital receipts.

The shift is subtle, but important. The question is no longer simply about restricting capital in times of vulnerability, but about enabling its calibrated participation in building domestic capability in a changing global economic landscape.

These shifts are further accentuated by ongoing geopolitical disruptions, including the West Asia crisis, which has once again exposed the fragility of global supply chains and underscored the importance of resilient and diversified economic linkages.

From caution to calibration

The recent changes to the PN3 framework are best understood not as a departure but as a refinement shaped by experience. The original architecture, requiring prior government approval for investment from land-bordering countries, remains intact. What has evolved is the way this framework now distinguishes between different forms of capital and varying degrees of influence.

However, this is not a mechanical relaxation. The framework carefully balances facilitation with oversight. Even where investments proceed under the automatic route, reporting obligations continue to apply, ensuring regulatory visibility.

More importantly, the role of control, particularly what may be described as ultimate effective control, remains central. Shareholding percentages offer guidance but do not conclude the enquiry. Governance rights, board influence and contractual arrangements continue to shape the regulatory outcome.

Equally significant is the introduction of a more disciplined approach to approvals in specific sectors. For investments exceeding the non-controlling threshold – particularly in identified manufacturing segments such as capital goods, electronic components and semiconductor-linked activities – the approval process is now accompanied by an indicative timeline of 60 days.

While its real test lies in consistent implementation, the articulation of a timeline itself is a departure from the earlier open-ended process.

It signals an acknowledgement that capital, much like markets, values certainty as much as opportunity.

The framework also builds in a measure of flexibility. The ability of the government to revise the list of priority sectors over time suggests a dynamic approach, one that can respond to evolving industrial priorities rather than remain stuck to a static classification. This is particularly relevant in sectors where technological shifts and geopolitical considerations continue to redefine strategic importance.

At the same time, a key safeguard remains unchanged. The benefits of this calibrated relaxation are largely confined to investments in Indian-owned and controlled entities. Where ownership or control lies outside this framework, the stricter approval regime continues to apply. This reinforces an underlying policy objective that has remained consistent since 2020, facilitating capital participation without compromising domestic control over strategic assets.

Viewed together, these changes reflect transition from a regime defined by caution to one guided by calibration. The effort appears to be to reduce friction for non-strategic, non-controlling investments, while continuing to subject influence and control to closer scrutiny. In doing so, the framework moves closer to aligning regulatory intent with market reality, an evolution that, perhaps, was always inevitable.

Capital avoids, dependency persists

If policy is shaped by caution, markets are shaped by necessity – and it is often in the gap between the two that the real story emerges.

In the past two decades, India’s experience with Chinese investment presents a paradox that is difficult to ignore. Between April 2000 and June 2025, the Chinese mainland ranked only about the 23rd-largest source of FDI into India, contributing a relatively modest share of total equity inflows. On paper, therefore, Chinese capital has never been central to India’s investment story.

Yet, the same cannot be said of trade and industrial dependence. Across sectors such as electronics, pharmaceuticals and renewable energy components, as well as critical manufacturing inputs, India’s reliance on Chinese imports remains significant and, in some cases, structural.

The imbalance is stark: while capital flows from China have been limited, the flow of goods and intermediate inputs has been both substantial and persistent.

This divergence raises an important question. If the objective of policy was to reduce economic vulnerability, has the restriction of capital flows achieved that outcome or merely shifted the form of dependence?

Classical economic thought offers a useful lens here. The “father of economics”, Adam Smith, cautioned against excessive restrictions on trade, noting that efforts to control economic flows often produce unintended consequences.

In a different context, Kautilya’s Arthashastra – an ancient text on statecraft and economic policy – emphasised strategic pragmatism where it serves long-term state interests; not isolation but calibrated engagement. Both perspectives, although centuries apart, converge on a simple idea: economic strength is built not by exclusion but by intelligent participation.

In this context, the idea of “China+1” must be understood more carefully. Often interpreted as a strategy of reducing dependence on China, in practice it has evolved into something more nuanced. Diversification of supply chains does not necessarily imply the absence of Chinese capital or capability. In several sectors, particularly manufacturing and electronics, the development of alternative ecosystems may, paradoxically, require some degree of Chinese participation, whether through capital, technology, or integration into existing value chains.

The experience of other economies offers a telling contrast. Countries such as Vietnam, Mexico and South Korea have, over time, attracted investment flow allowing them to integrate more deeply into global supply chains, even while maintaining competitive positioning. The lesson is not about replicating their models, but recognising that supply chain realignment is as much about capability creation as it is about risk diversification.

In India’s case, the persistence of high import dependence alongside relatively low inbound investment suggests that the relationship between capital and capability remains incomplete. Allowing investment under calibrated and controlled conditions – particularly where it leads to local manufacturing, job creation and technology transfer – may help internalise parts of the value chain that are currently external. In other words, the origin of capital may matter less than the location of value creation.

Seen in this light, the recent refinements to the PN3 framework acquire a broader economic significance. They are not merely regulatory adjustments; they reflect a gradual recognition that capital, when appropriately governed, can be a tool for reducing vulnerability rather than deepening it.

And perhaps, as economists in hindsight often observe, the data was always there. The challenge lay not in its availability, but in how it was read.

From ambiguity to executability

For global funds and institutional investors, the significance lies less in the introduction of a new concept and more in the formal recognition of what had, until now, operated as an interpretative position. The real value, therefore, lies in certainty and consistency of application, rather than in any substantive dilution of safeguards.

A practical illustration highlights this shift. Consider a diversified offshore fund with a minor exposure to a land-bordering jurisdiction. Under the earlier regime, even a sub-threshold indirect holding could place the investment in a grey zone, often leading to conservative routing through the approval mechanism.

But now the revised framework – by clarifying both thresholds and the level at which beneficial ownership is to be assessed – reduces this ambiguity and allows for a more predictable evaluation.

However, this clarity operates within a broader and inherently layered regulatory environment. The PN3 framework does not function in isolation; it must be read alongside FDI policy, the Foreign Exchange Management Act (Non-Debt Instruments) Rules, 2019 – which needs amendment for PN3 to become reality – and sector-specific conditions, each of which may independently shape the permissibility of an investment.

In addition, requirements relating to downstream investments, reporting obligations and security clearances for individuals from land-bordering jurisdictions continue to apply in parallel.

This creates a compliance landscape where a transaction may appear permissible under one framework yet require additional scrutiny under another.

The movement towards permitting certain investments under the automatic route is therefore accompanied by a corresponding shift towards post-investment oversight, particularly through disclosure and reporting requirements.

Importantly, the framework continues to place emphasis on control and effective influence. The presence of governance rights, whether through board representation, veto rights or contractual protections, may still bring an investment within the approval requirement, notwithstanding compliance with ownership thresholds. In that sense, the regulatory enquiry remains firmly anchored in substance.

Certain grey areas are also likely to persist. The treatment of multi-layered fund structures, aggregation of indirect holdings, and the extent to which contractual rights translate into “control” will continue to require case-specific analysis. These are not gaps that can be entirely eliminated through drafting; they are inherent to the complexity of modern investment structures.

Viewed in this light, the evolution of PN3 is not an isolated policy shift. It forms part of a broader recalibration of India’s economic strategy.

Alongside refining the framework governing capital inflows, the government has continued to strengthen export-oriented measures including extensions under the Remission of Duties and Taxes on Exported Products scheme.

This reflects an important policy recognition that reducing structural dependence cannot be achieved solely by regulating the origin of capital, but equally by enhancing the competitiveness of domestic industry in global markets. In that sense, investment regulation and export incentives operate not as parallel tracks, but as complementary levers in repositioning India within global value chains.

Viewed holistically, the amendments do not remove regulatory complexity; they redistribute it.

For legal and compliance teams, the task is no longer limited to navigating approvals. Now it extends to designing investment frameworks that are coherent across multiple regulatory lenses and resilient to scrutiny over time. Consequently, greater responsibility rests on structuring, documentation and ongoing compliance.

Conclusion

Introduced in a period of uncertainty, PN3 served a clear and immediate purpose, protecting domestic enterprise from opportunistic acquisition at a time of economic vulnerability.

What is perhaps more instructive, however, is the regulatory metamorphosis that followed. As has often been observed, it is easier to introduce restrictions than to recalibrate them.

The recent 2026 amendments in that sense represent not a reversal, but a recognition of the need to align policy with the realities of capital flows, supply chains and industrial ambition.

As India moves towards its goal of becoming a Viksit Bharat (Developed India), the objective will not be to choose between openness and protection, but to design mechanisms that enable strategic integration with global capital while strengthening domestic economic foundations, with certainty that helps the ease of doing business.

And perhaps, in the end, the lesson is a quiet one. As India’s celebrated Nobel Prize-winning lyricist, Rabindranath Tagore, observed: “The same stream of life that runs through my veins night and day runs through the world and dances in rhythmic measures.”

If policy is now beginning to reflect that understanding, it marks not merely a change in rules but a refinement in how reality itself is read.

In the realm of global capital, India has chosen not to sever the stream but to direct its dance, ensuring that while the world’s wealth flows through our markets, the pulse remains unmistakably our own.

Rajiv Malik is legal leader at LG Electronics

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Yet, capitalising on the attention economy is more lucrative than frivolous. With shrinking attention spans, shifting goalposts of beauty, and millions of dollars worth of brand deals on the line, there is significant economic incentive for being ahead of the latest trends.

With a little help from GLP-1 medications, affordable botox and fillers, and editing tools, achieving these unrealistic standards has never been more accessible. But with improvements in technology, especially AI-powered editing tools, not everyone with access to these resources uses their power for good.

The slew of Indian celebrities approaching court to seek protection from unauthorised use of their likenesses in undesirable ways is one example, proving that the online world is an increasingly scary place.

MEITY rules broaden AI labels

In this vein, the Ministry of Electronics and Information Technology (MEITY) made amendments to the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021, in February 2026, to include digitally manipulated content.

Under the new rules, “synthetically generated information” includes visual or audiovisual information that is artificially created, generated, modified or altered in a way that appears to be real, and depicts an individual in a manner that is, or is likely to be perceived as, real.

All such information is now subject to the rules and new labelling requirements that require synthetically generated information to be identified as such, including permanently embedded metadata and information to help ascertain the originating computer.

Answers to frequently asked questions released by the MEITY reveal a key reason for these changes to be the rise in AI and machine learning technologies. However, the definition of synthetically generated information sweeps into its ambit a lot more information than seemingly intended. This could be a problem, especially for the creator industry.

The use of editing tools like Photoshop for pictures and ads is nothing new. A simple search on any app store reveals several similar tools that allow anyone to “improve” their appearance with a few keystrokes. From removing background objects and digitally adding makeup to physically slimming down a body, enhancing an image has never been easier.

What is different is the market these apps cater to. Facetune, for instance, is promoted as the “go-to choice for influencers, creators, or anyone who wants to keep their content on Instagram or any social platform fresh and interesting”, allowing you to “show up online exactly how you want to be seen”. In its own words, striving to create an inherent contradiction between our online and in-person selves.

The wide net that the rules cast on digitally altered content could affect countless creators.

As a bit of respite, they do provide exceptions for some information that will not be considered synthetically generated. This includes information created or altered by routine or good-faith editing, and colour adjustments that do not materially alter, distort or misrepresent the substance, context or meaning of the underlying information.

However, assessing whether a piece of content falls within this exception can only be judged on a case-by-case basis, both by the form and substance of the content, and the edits. For instance, it would be hard to argue that a fitness influencer altering the way his/her body appears to promote a protein powder is editing the content in good faith, or that it does not misrepresent its context.

Authenticity threatened by AI rules

In an industry that thrives on authenticity and trust – with communities engaging with creators seen as more “real” – perceived falsity could be a death knell. Rules that set out to protect people from real harm that AI-generated content might have are also creating ripples of unintended consequences in an entirely unrelated segment.

As one creator put it: “If [using these editing tools is] done properly, it should be hard to tell you’ve used it.” However, once these editing tools begin to embed alteration signifiers, perhaps restraint will become key.

Ashima Obhan is a senior partner and Shuchi Dutta is a senior associate at Obhan Mason

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The framework plugs earlier lacunae, by codifying permissible transactions, reporting obligations and enforcement mechanisms.

The regulations adopt an expansive definition of “guarantee”. This encompasses counter-guarantees and any arrangement to perform a promise or discharge a debt, obligation or liability on default of the principal debtor, thereby capturing diverse credit enhancement instruments in international commerce.

RBI cross-border guarantee rules explained

Regulation 3 imposes a general prohibition that no resident in India be party to a guarantee involving a person resident outside India except in accordance with the regulations or with prior approval of the RBI, reflecting the Foreign Exchange Management Act, 1999 (FEMA) regime’s default rule of regulatory oversight unless expressly permitted.

Regulation 4 carves out exemptions, including those by offshore branches of authorised dealer banks, or within international financial services centres, unless any party is resident in India. It further excludes Irrevocable Payment Commitments by authorised dealers as custodian banks to authorised central counterparties where the principal debtor is a registered foreign portfolio investor. Guarantees issued under the Foreign Exchange Management (Overseas Investment) Regulations, 2022 are likewise exempt.

Regulation 5 permits residents to act as surety or principal debtor, subject to the underlying transaction being FEMA-compliant and the parties satisfying borrowing-lending eligibility, reflecting the credit-equivalent nature of guarantees. This requirement is relaxed for authorised dealer bank guarantees backed by counter-guarantees or full non-resident collateral.

Regulation 6 imposes a due diligence obligation by allowing resident creditors to obtain guarantees where both the surety and principal debtor are non-residents.

Regulation 7 marks a pivotal advancement in the regulatory architecture by instituting a structured and comprehensive reporting regime. Reporting rests with the resident surety where applicable; with the principal debtor where the guarantee is arranged by it and the surety is non-resident; and with the creditor in situations where both the surety and principal debtor are non-resident, or where the creditor itself has arranged the guarantee.

Regulation 8 prescribes a fee for delayed reporting, calculated as INR7,500 (USD80) plus 0.025% of the amount involved multiplied by the period of delay, ensuring certainty and proportionality.

RBI guarantee rules boost transparency

The regulations dispel ambiguity by delineating permissible guarantee structures and anchoring them to borrowing-lending eligibility, ensuring coherence and curbing arbitrage, while preserving flexibility for collateralised bank guarantees. The quarterly reporting regime affords the RBI near real-time visibility over cross-border exposures.

The regulations invite certain reservations:

1. 1. The borrowing-lending eligibility requirement may operate with undue rigidity in bona fide commercial contexts, necessitating prior approval from the RBI;
   2. The reporting regime imposes a material compliance burden, especially given the stringent timelines; and
   3. The absence of guidance on substantive modifications and the treatment of pre-existing guarantees as fresh issuances may disrupt data continuity.

Cross-border guarantee rules strengthened

The regulations mark a significant advancement in the regulatory framework governing cross-border guarantees. With defined eligibility thresholds, granular reporting and calibrated enforcement, they enhance transparency and strengthen the RBI’s oversight of external sector risks.

However, effective implementation hinges on pragmatic calibration, clarity and proportionate compliance to balance commercial facilitation with prudential discipline.

Aman Avinav is a partner (dispute resolution, white-collar crimes & investigation) at Phoenix Legal.

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It is now a pressing priority to invest and innovate in clean energy in order to negate the impact of supply chain disruptions.

Amid deliberations over the most adaptable and scalable renewable energy, green hydrogen’s potential as a tool to reduce the carbon footprint is increasingly gaining ground.

Unlike the extraction-based crude oil industry, hydrogen is conversion-based, making it a geographic leveller from an access perspective, especially in hard-to-abate sectors like steel, fertiliser manufacturing and petroleum refineries. By 2050, it could meet 12% of global energy consumption.

Crucially, for India, it bolsters energy security by reducing import dependence and mitigating the price vulnerability inherent in traditional hydrocarbon markets.

India’s 2026 green hydrogen push

India is steadily progressing towards its target of 5 million metric tonnes of green hydrogen by 2030, with recent government reports indicating that India’s green hydrogen capacity stood at 8,000 tonnes per annum in February 2026.

Proclaimed the “year of execution”, 2026 is witnessing global projects move from roadmaps to contracting and construction. Significant commercial signals through several large-scale pilots are emerging, bringing India’s green hydrogen pipeline to nearly 40,000 tonnes per annum.

Undoubtedly, India is amplifying its green hydrogen efforts, championing it as the fuel of the future. However, the liquidity gap and infrastructural nascency impedes the speed of adoption. Consequently, India continues to meet 85% of its energy needs through imported crude oil.

The path to green hydrogen adaptation faces imposing roadblocks. The primary barrier is economic and electrical efficiency.

Producing one kilogram of hydrogen requires 50-55 units of electricity while the reconversion process entails inevitable energy loss. India’s grid remains at a developmental stage, where an unprecedented surge in consumption may lead to curtailment and congestion. There are also the mammoth storage and transportation costs to reckon with.

Intermittency remains an infrastructural hurdle, as industrial processes require 24/7 supply that renewables cannot provide without expensive storage solutions like pumped hydro or battery systems. Added to that, shortages of raw materials for electrolysers and high capex create price fluctuations.

Another key challenge is accelerating a sustained demand for new energy sources like green hydrogen, and not a knee-jerk response to a particular crisis.

Robust policies propel India’s green hydrogen

Steering India’s green hydrogen-centric energy transition requires robust policies and regulations, backed by adequate investment and infrastructural preparedness. Currently, India’s National Green Hydrogen Mission and the Strategic Interventions for Green Hydrogen Transition Programme provide vital financial incentives for green hydrogen and its derivatives’ production.

Several international mandates like the EU’s RFNBO (Renewable Fuels of Non–Biological Origin) and CBAM (Carbon Border Adjustment Mechanism) are acting as regulatory catalysts, making decarbonisation essential for Indian exporters.

Much is being done but much remains to be done.

Offtake certainty, standards and sector focus

For these policies to succeed, the government must facilitate long-term offtake contracts to align with the lifespan of heavy infrastructure. Establishing a transparent internationally aligned system for certification and price discovery will be critical.

Regulations propelling budgetary prioritisation of sectors where green hydrogen is the only viable alternative to fossil fuels alongside derisking investments through tax relief and other subsidies including land, water, transmission, etc., are imperative.

While it does not seem likely that green hydrogen will bulwark India from the ongoing oil crisis, its role in decarbonising hard-to-abate sectors and building fuel efficiency is indispensable for national resilience in the coming years. India must look beyond a mission statement and enable legislative and regulatory pivots in India’s energy consumption and production patterns.

Anjan Dasgupta and Roochi Loona are partners at DSK Legal. Yashaswini Basu, an associate, contributed to the column

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Jahnavi Dwarkadas and Sweta Mehta were elevated to partners in the private client and banking & finance practice groups, respectively, while Lokesh Malik was elevated to associate partner in corporate litigation.

Additionally, Manan Pant, Ayushi Parnami and Aniket Pinto were promoted to principal associates in banking & finance, corporate & financial services, and real estate, respectively.

Managing partner Amit Aggarwal said: “Jahnavi, Sweta, Lokesh, Manan, Ayushi, and Aniket have made significant contributions towards the growth of the firm by mentoring teams, handling a diverse spectrum of work, taking ownership, and playing an active role in institution building.”

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With more than two decades of experience in indirect tax litigation and advisory, Shekhar has worked before the Supreme Court of India, various high courts, and the Customs Excise and Service Tax Appellate Tribunal. He has also advised senior advocates on complex and high-stakes matters.

Before joining JSA, he was a partner at DMD Advocates in its indirect tax litigation and advisory practice. Earlier in his career, he worked as a tax litigator at Trilegal, Advaita Legal, Vaish Associates Advocates, and Lakshmikumaran & Sridharan. He also worked in the chambers of senior advocate Rakesh K Khanna.

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Tiwari was previously a partner at Shardul Amarchand Mangaldas in its capital markets practice.

“Trilegal has built a capital markets practice recognised for its institutional strength, thoughtful structure and collaborative approach,” said Tiwari on joining the firm.

“As issuers and investors become more sophisticated, there is a significant opportunity to deliver differentiated value.”

Tiwari brings significant experience advising issuers, investment banks and investors across a range of securities offerings including initial public offerings, institutional placements and bond issuances.

He also adds to the firm’s expertise in advising hybrid securities offerings by real estate investment trusts (REITs) and infrastructure investment trusts (InvITs).

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India’s private equity (PE) and venture capital (VC) landscape remains robust with an investment inflow of USD49.3 billion last year. As capital continues to flood into the economy, investors rely on various mechanisms to monitor and protect their investments in companies.

One such mechanism is the appointment of “board observers”, namely individuals permitted to attend board meetings on their behalf.

Board observers versus directors’ duties

These observers receive copies of all notices, minutes and other materials provided to the directors but differ from directors in two critical respects.

First, they are not entitled to vote on board resolutions. Second, the role and duties of an observer is not statutorily recognised under the Companies Act, 2013.

For instance, section 166 of the act requires directors to act in good faith to promote the company’s objects, exercise reasonable care, skill and diligence, apply independent judgement, avoid conflicts of interest, and refrain from securing undue gain for themselves or their relatives; with non-compliance resulting in the imposition of monetary penalties.

By contrast, an observer’s appointment, role, obligations and rights arise solely from inter-se agreements such as shareholders’ agreements, articles of association and/or investment agreements.

Consequently, an observer seat is an attractive alternative for investors who do not wish to appoint directors in every portfolio company, especially at early stage investments.

India scrutinises board observers

In recent years, however, recognising the influence observers may have over company decisions despite a lack of voting rights, regulatory scrutiny over observer appointments has grown. For example, the revised Competition (Criteria for Exemption of Combinations) Rules, 2024 now provide that acquisitions of less than 25% shares in an entity would not be exempt from notification if the acquirer obtains the right to have representation on the board of directors of the acquiree entity either as a director or an observer.

Similarly, in December 2024, the Reserve Bank of India (RBI) issued directions to non-banking financial companies (NBFCs) requiring them to ask their observers to resign and offer themselves for appointment as directors instead.

This direction comes in the wake of several measures designed to tighten prudential norms for NBFCs, reduce regulatory arbitrage and strengthen governance structures of NBFCs, particularly considering the surge in PE/VC investments in the financial sector.

RBI directive turns observers directors

The RBI’s rationale seems to be rooted in the view that investors often place observers in NBFCs to avoid the liabilities that board members face, while still enjoying the rights to participate in such meetings.

However, while the directive aligns accountability with board influence by requiring observers to resign and become board directors, it also creates significant challenges.

As the primary function of an observer is to protect and represent investor interests in board meetings, requiring an observer (appointed solely as an investor representative) to owe a fiduciary duty to the company and its stakeholders could give rise to certain challenges.

The directives’ implementation also creates practical difficulties, especially in cases where an investment is not significant enough to commercially justify the granting of a board seat or voting rights. Both the NBFCs and investors may be opposed to such forced restructuring of the board composition.

Investors replace observers with protections

With this shift, investors who can no longer rely on an observer must now ensure their investment agreements contain robust contractual rights to receive necessary information and updates from the company.

Furthermore, where directors are appointed in place of resigned observers, it will become increasingly important for investors to require investee companies to maintain adequate directors and officers’ insurance to protect nominee directors against personal liability in case of defaults under applicable law.

In conclusion, the era of using observers as a low-risk monitoring tool in NBFCs is coming to an end – with the regulatory environment now demanding that anyone with a seat at the board table, whether they vote or not, accepts the corresponding legal responsibilities.

Swathi Girimaji is a partner, practice lead, VC and growth stage investments, and Theertha Aiyappa is an associate at Bharucha & Partners

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The result has been overlapping and often contradictory national and international rules that cause confusion and increase compliance costs.

Standards and testing block ICT

Unlike tariffs, which can be absorbed into pricing, technical regulations and conformity assessments substantially restrict market access for global players. This reality is reflected in the US-India Joint Statement on the Interim Trade Agreement.

Designed to significantly increase bilateral trade in technology products and expand joint technology co-operation, the agreement commits both sides to: eliminate restrictive import licensing procedures that delay information communications and technology (ICT) market access; determine whether US or international standards are acceptable for exports to India; and discuss respective standards and conformity assessment procedures in mutually agreed sectors.

These commitments underscore that alignment with global norms is not only a strategic necessity for India’s digital economy but also a central pillar of its trade relationship with the US and other partners.

Market access for ICT products to India requires compliance with technical standards and conformity assessment procedures. This includes the Mandatory Testing and Certification of Telecom Equipment (MTCTE) regime, which requires domestic certification for telecoms products to be operated in India.

ITSARs and BIS hinder market access

Specifically, the Indian Telecom Security Assurance Requirements (ITSARs) introduce security testing requirements for telecoms equipment, such as vulnerability analysis, penetration testing, and most controversially, source code review to be conducted at designated laboratories in India.

Additionally, electronic products such as mobile devices, tablets and laptops are also required to comply with Conformity Assessment Regulations issued by the Bureau of Indian Standards (BIS). These measures act as non-tariff barriers for foreign manufacturers. As noted in The Economist, standards work best when aligned with capacity.

Industry stakeholders have consistently raised concerns about the shortage of accredited testing labs in India, the non-recognition of internationally accredited testing facilities outside India, reliance on Indian Standards (IS) rather than internationally recognised standards, etc.

Such requirements result in delays and additional compliance costs. For foreign companies, they also complicate supply chain resilience and raise concerns about “China + 1” strategies adopted by their respective countries for shifting manufacturing facilities outside China.

Non-tariff barriers threaten AI goals

India’s ambitions in artificial intelligence (AI) highlight the risks of relying on non-tariff barriers for encouraging domestic production of ICT products. The AI Compute Pillar of the IndiaAI mission aims to provide approximately 50,000 high-end graphics processing units (GPUs) at affordable costs to select enterprises in India.

These GPUs are imported from the US and highlight the imperative of aligning with US or international standards to help prevent any countervailing action by US authorities. Restrictive standards and testing requirements risk delaying access to the components that India needs to accelerate AI adoption.

India’s regulatory choices cannot remain insulated from global practice. Non tariff barriers and domestic testing regimes may serve short-term objectives, but they risk undermining India’s technological ambitions if left unaligned.

The operationalisation of the commitment under the India-US interim trade agreement to determine the acceptability of US developed or international standards for exports to India, along with respective standards and conformity assessment procedures in mutually agreed sectors, is therefore pivotal.

Harmonisation essential for digital trade

Without harmonisation on standards and conformity assessment, India exposes itself to possible countervailing action by the US, which may jeopardise the IndiaAI mission and discourage other countries from “friendshoring” their manufacturing facilities away from China.

Jasman Dhanoa is a senior associate and Anindita Deb is an associate at ADP Law Offices

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Group ownership and collective compliance

The concept of “ownership” now explicitly encompasses equity held directly or through the captive user’s subsidiary companies, holding company, and other subsidiaries of such holding company. This recognition of group ownership structures eliminates the interpretational vacuum that earlier denied captive benefits to legitimate group entities. A captive user that is a company is now deemed to include its subsidiaries, holding company and other subsidiaries for ownership and consumption purposes.

Earlier, the Supreme Court, in the matter of Dakshin Gujarat Vij Company Limited v Gayatri Shakti Paper and Board Limited, held that an SPV constitutes an AoP under rule 3, making the proportionality requirement applicable. This resulted in a unitary qualifying ratio, requiring each captive user to consume electricity broadly in proportion to its ownership (plus-minus 10%), where non-compliance by any user could impact the captive status of the entire plant.

The amendment rules depart from this rigid approach by shifting to a collective compliance framework, where aggregate consumption determines qualification and deviations only affect individual captive benefit, rather than overall captive status.

SPVs are now characterised as AoPs for captive generation purposes, subjecting them to the proportionate consumption framework. Each captive user within an AoP is permitted to draw power based on operational requirements; however, individual captive consumption is admissible only up to 100% of their proportionate entitlement, calculated with reference to their ownership share in the total captive plant.

Any consumption exceeding the proportionate limit does not qualify as individual captive consumption, however such excess consumption continues to be reckoned towards meeting the collective 51% consumption requirement at the plant level. This preserves the flexibility of a group captive model while preventing disproportionate allocation of captive benefits.

26% ownership carve-out for captive power

A significant carve-out applies where an individual captive user holds not less than 26% ownership. In such a case, the proportionate consumption ceiling does not apply and the entirety of that user’s consumption qualifies as captive consumption.

Where the minimum captive consumption requirement is not met during the financial year, the entire electricity generated by the power plant is treated as supply of electricity by a generating company, attracting cross-subsidy surcharge and additional surcharge; further, in the case of AoPs, any consumption by an individual captive user in excess of its proportionate entitlement is treated as non-captive supply to that extent and is accordingly liable to such surcharges.

Where ownership patterns vary across the financial year – a common occurrence in SPVs and AoPs due to share transfers, restructuring or phased operations – proportionate consumption is to be determined on the basis of weighted average shareholding of such captive user during the financial year.

Captive power verification: Nodal agencies, NLDC appeals

On verification, the rules establish a structured nodal agency framework. For intrastate captive arrangements, verification is undertaken by a nodal agency designated by the respective state government. For interstate arrangements, responsibility has been assigned to the National Load Despatch Centre, replacing the Central Electricity Authority’s earlier role. An appeal against such verification is provided through a Grievance Redressal Committee constituted by the appropriate government.

Pending verification, captive users are not liable to pay the cross-subsidy surcharge and additional surcharge, subject to submission of the prescribed declaration. Where the generating plant subsequently fails to qualify as captive, the applicable surcharges become payable along with carrying costs, calculated at the base rate of Late Payment Surcharge under the Electricity (Late Payment Surcharge and Related Matters) Rules, 2022.

Anubhav Tiwari is a partner and Jahnavi Tolani is an associate at Sarthak Advocates & Solicitors

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